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Friday, January 31, 2020

Disney and the Economy: Downside Concerns

by Ray Keating
January 31, 2020

The Walt Disney Company cuts across industries, covering retail, travel, theme parks, movies, television, online streaming, and more, not to mention being a global enterprise. So, this diversified company can seize on assorted opportunities and benefits when U.S. and global growth are strong. And while Disney also has considerable exposure to economic woes and uncertainties, industry and regional diversification can aid the firm in weathering economic storms.

Right now, the risks for a company like Disney tilt to the downside. Consider some key issues, facts and trends.

• U.S. Growth. Contrary to claims from a variety of talking heads on television and in politics, the U.S. economy remains a mixed bag. For example, while the U.S. labor market is tight, economic growth has slowed. Fourth quarter 2019 real GDP (just reported on January 30) grew by 2.1 percent (annualized rate). That replicated the 2.1 percent growth in the third quarter, and wasn’t substantively different from the 2.0 percent rate in the second quarter. Consider that the post-World-War-II U.S. growth rate averaged 3.2 percent (and better than 4 percent during non-recession periods). Particularly troubling for the U.S. is that business investment has declined for three straight quarters now, which not only negatively affects current growth, but future growth as well.

• Trade Troubles. The anti-free-trade policies of the Trump administration have been a key negative for the U.S. economy. U.S. real export growth was non-existent (0 percent) in 2019, while imports barely edged forward (1.0 percent). As I noted in another analysis on trade policymaking, “The result has been that trade has shaved a significant 0.5-to-0.7 percentage points off of average overall real U.S. economic growth – if not more when you factor in the reach of trade across sectors, including the role that the trade war has played in the recent decline in business investment.”

• Consumer Slowing. Given the ills on the business investment and trade fronts, the consumer has been the key source for growth in the U.S. recently. However, real personal consumption expenditures growth slowed in the fourth quarter, from 4.6 percent in the second quarter 2019 to 3.2 percent in the third quarter and 1.8 percent in the fourth. 

Also, after a lengthy stretch of strong growth, real per capita disposable income moved down slightly during the last three months of 2019. Real per capita disposable income – which is personal income minus personal current taxes, adjusted for population and inflation – is important to watch because this measures the dollars that individuals have for investing, saving and consuming.

• China. China’s troubles continue to mount regarding the outbreak of the coronavirus, with deaths now reportedly topping 200 and those sick nearing 10,000 (as of early afternoon EST on Friday, January 31). 

• Europe. The Wall Street Journal noted on January 31 that growth slowed notably in the eurozone, with growth the slowest since 2013. Also, it was reported that economists aren’t expecting a pick-up in eurozone growth in 2020.

• Politics. Political risk and uncertainty promise to mount as a volatile U.S. presidential race, along with House and Senate contests, roll along during 2020.

So, economic concerns cut across the U.S., Europe and China, which are the major markets for Disney.

Against these concerns, it also must be noted that the only portion of the economy’s investment numbers showing consistent, strong growth has been in intellectual property products, that is, investment in software, research and development, and entertainment, literary, and artistic originals. That’s obviously a big area for Disney. 

And all indicators regarding Disney itself continue to point to investment growth in parks, cruise ships, streaming content, movies, and so on. Of course, though, short-term economic changes affect immediate investment and operational decisions, but Disney is a company poised to stay focused on long-term investments, opportunities and profitability.

Ray Keating is the editor, publisher and economist for DisneyBizJournal.com, and author of The Disney Planner 2020: The TO DO List Solution and the Pastor Stephen Grant novels. He can be contacted at  raykeating@keatingreports.com.

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